Financial Review

Generally Quite High

Sinclair Noe — May 6, 2015

 

Podcast: Play in new window | Download (Duration: 13:16 — 6.1MB)

Subscribe: iTunes | RSS

DOW – 86 = 17,841
SPX – 9 = 2080
NAS – 19 = 4919
10 YR YLD + .07 = 2.24%
OIL + .30 = 60.70
GOLD – 1.80 = 1192.20
SILV – .02 = 16.59

A worldwide sell-off in government bonds deepened today. Benchmark 10-year Bunds now trade at 0.53%, having hit a record low of 0.05% last month, when many expected them to turn negative. For German bund investors that represents a 12% loss over the past 2 weeks, or roughly 25 years of yield just went down the drain. In the past month, the yield on French 10 year debt is up 42 basis points, on 10-year Italian bonds the yield is up 62 basis points, Australia up 62 basis points, Hong Kong up 29 basis points. And here in the US, the 10 year Treasury yield has jumped from 1.9% a month ago, to 2.24% today. Around the world yields have been rising and bond prices have been falling.

Meanwhile, oil prices have been rising. Crude prices hit fresh 2015 highs; earlier in the session prices topped $62 a barrel before sliding back. This follow a 22% gain in April. A couple of reports show oil supplies dropping for the first time this year. U.S. oil inventories fell 3.9 million barrels last week, the first weekly decline since Dec. 26, according to data provided by the U.S. Department of Energy. Late yesterday, the American Petroleum Institute reported stockpiles fell by 1.5 million barrels. The data showed a sharp drop in imports for the week, likely just a blip in the reporting. Meanwhile, domestic oil production remains strong at more than 9.3 million barrels a day, declining by just 4,000 in the weekly data, and crude inventories remain near record highs, at 487 million barrels. So, the price of oil rallied well before any recovery in supply-demand balances.

Still, the price of oil is what it is, and compared to 2 months ago, it has now recovered enough to provide inflationary pressure. Fuel prices are a key ingredient to a basket of goods that are measured to determine inflation. And the price of oil affects much more than just the price at the pump; it affects manufactured goods or anything that requires energy or transportation. We don’t know if the recovery in oil prices will continue or not, but the recovery has been strong enough to have an inflationary impact. When oil prices rise because of increased demand that indicates the economy is strong and we need more oil to transport all the products being made and services being sold; however, when oil prices rise due to a reduction in supply that indicates the economy is shrinking not growing; when we have a recovery in inflation without a recovery in growth, the result is stagflation, which is still a form of inflation, even if it turns out to be temporary.

And the bond market hates inflation because it erodes the real, inflation adjusted return on bonds. An uptick in inflation could also give the Fed leeway to raise short-term interest rates in order to reduce the demand for credit and help prevent the economy from overheating. So this might go a long way to explaining the meltdown in bonds in the past few weeks.

There are other explanations to consider as well. The increase in oil prices might be due, in large part to speculative traders, first betting on lower oil prices, and as prices moved a little higher, they were caught in a short squeeze. Tens of millions of barrels are struggling to find buyers in Europe with traders of West African and North Sea crude blaming poor demand. The deep disconnect between the oil futures and physical markets looks similar to the events of June 2014 when the physical market weakness became a precursor for a futures price crash. Traders said around 80 million barrels of Nigerian and Angolan crude oil are on the market with at least a dozen May-loading cargoes still available. Futures prices do not match the physical market.

Still, higher oil prices have an inflationary impact that is being felt in the bond market, kind of, sort of. The bond market is not oblivious to higher oil prices, but there might be another reason for falling bond prices. Maybe central banks have decided to ease up on bond purchases. The Federal Reserve stopped large scale asset purchases a few months ago, but the European Central Bank stepped in with their own quantitative easing program, buying about $66 billion worth of bonds a month, which would push bond prices higher, unless there was a pause in their purchase plan. Maybe that has something to do with the bond meltdown, maybe not. These are complex markets, and they can be moved for any number of reasons, but we do know that whatever is happening is reflected in price, and the price has been moving lower. And as bond prices move lower, stock prices have also been moving lower.

This morning, Federal Reserve Chairwoman Janet Yellen warned of the risks in the stock and bond markets in the environment of low interest rates. Yellen said that equity market valuations are “generally quite high” and “there are potential dangers there.” Yellen was speaking at a forum on finance in Washington, and she added: “Now, they’re not so high when you compare the returns on equities to the returns on safe assets like bonds, which are also very low, but there are potential dangers there.”

Using a valuation technique sometimes referred to as the Fed model, U.S. equities remain cheap compared with government bonds. The S&P 500’s earnings yield, or profit as a percentage of price, stands at about 5.5 percent, more than twice the 2.2 percent rate on 10-year Treasuries. Still, Yellen said the Fed is aware of the possibility that there could be a sharp jump in long-term rates when the Fed raises interest rates. The announcement from Yellen sounded like so much jawboning; the Fed may have some concerns about inflation but right now the economy is not showing signs of strength, not enough to warrant a rate hike.

Productivity in the U.S. fell in the first quarter; the largest back-to-back decline in more than two decades. The measure of employee output per hour decreased at a 1.9% annualized rate, following a 2.1% drop in the fourth quarter. Part of the blame may be attributed to the harsh weather, port-related delays, the stronger dollar and a drop in oil costs that brought the economy to a near-halt in the first quarter and hurt efficiency and profits. The lack of business investment in new technology may also mean productivity will continue to stall. As worker costs are pushed up, it also means corporate profits will be challenged.

ADP, the payroll processing firm, reports the economy added just 169,000 private sector jobs last month; the first time in two years that new jobs created has dipped below 200,000 for two months straight. ADP says job creation has slowed for five months in a row. Mark Zandi, chief economist of Moody’s Analytics issued a report saying: “Fallout from the collapse of oil prices and the surging value of the dollar are weighing on job creation. However, this should prove temporary and job growth will reaccelerate this summer.” The ADP report is sometimes considered an indicator, or maybe an omen, of the Labor Department’s monthly jobs report, which will be reported Friday.

Greece has made a €200 million-euro interest payment to the IMF, although concerns over its future continued to rattle European markets. Athens faces another €750 million-euro debt repayment due on May 12 and it isn’t clear where the money is going to come from. The cash-strapped country still remains in a deadlock with creditors over its next tranche of bailout funding. Meanwhile, the possibility of a Greek default is another factor weighing heavily on the European bond market. It is estimated that past week’s losses on German bonds erased $410 billion in valuation – more than enough to pay for the Greek debt. I’m just saying.

The 2010 “flash crash” that sent the Dow plunging almost 1,000 points was five years ago today. But since then, there have been changes made in the hope of reducing the chances that it could happen again. The British trader fighting extradition to the U.S. on charges of having contributed to the 2010 “flash crash” told a London court today that he’d done nothing wrong.

In today’s edition of “Banks Behaving Badly”: According to its latest quarterly filing, JPMorgan is in “advanced stages” of settlement talks with the DOJ and Federal Reserve over previously disclosed foreign exchange investigations. The bank said the amount it may need to pay – in excess of legal reserves – could be as much as $5.5 billion. Meanwhile, JPMorgan has been placed under formal investigation in France as part of a probe into alleged tax evasion by senior managers at investment firm Wendel, part of a wider investigation in which as many as 14 Wendel executives face charges including tax evasion and insider trading over transactions conducted in 2004-2007. The bank is suspected of acting as an accessory to tax evasion.

The City of Los Angeles has filed a civil lawsuit against Wells Fargo alleging the bank has been looking the other way as its sales people opened up accounts and issued credit cards to customers without their knowledge or permission. Wells Fargo has pushed to get every customer to carry at least 8 different Wells Fargo accounts. Wells Fargo employees said that the company had a systematic, high-pressure quota system for employees that ultimately left them with the choice of engaging in fraud, or being disciplined or fired. Employees were expected to constantly get customers to open new accounts and purchase new banking products, or else. To reach the quota, sales people just started inventing accounts. Some employees went so far as to raid client accounts for money to open additional accounts.

In addition to charging fees on unwanted accounts, San Francisco-based Wells Fargo harmed customers by placing them into collections based on unauthorized withdrawals and reported damaging information on their credit reports when unwarranted fees went unpaid. The lawsuit seeks a court order shutting down the alleged wrongdoing, along with penalties of up to $2,500 for every violation and restitution for customers who were harmed. Wells Fargo denies the allegations.

FINANCIAL REVIEW

Test Results Are In

Sinclair Noe — November 24, 2014

 

Podcast: Play in new window | Download (Duration: 13:16 — 6.1MB)

DOW + 7 = 17,817
SPX + 5 = 2069
NAS + 41 = 4754
10 YR YLD – .01 = 2.31%
OIL – .81 = 75.70
GOLD – 3.80 = 1199.30
SILV + .02 = 16.57

The S&P 500 has gained 11% since bottoming out in a slump that stretched from mid-September to mid-October. The rally has been driven by a belief that central bank actions in Europe, China and Japan will help invigorate global economic growth. On Friday, China’s central bank lowered a key interest rate and European Central Bank President Mario Draghi said he was willing to step up the bank’s efforts to stimulate the Eurozone, which has been struggling.

Speaking of European investors that sell assets to the ECB moving into other, more risky, assets that would help accelerate the euro area’s growth, Draghi said that higher prices for European assets might encourage some foreign holders to switch away from the euro, with “investors rebalancing portfolios away from euro-denominated assets towards other jurisdictions and currencies providing higher yields.”

Just to make sure that listeners got the message, he added there was evidence that the asset-purchase programs of the U.S. Federal Reserve and the Bank of Japan “led to a significant depreciation of their respective exchange rates, even in a situation in which long-term yields were already very low, as in Japan.” You have been warned; the euro, like the yen, is heading lower.

You have low interest rates and despite talk in the US about the Fed raising rates, that is a long way off, maybe another year; meanwhile long-term rates continue to grind lower in most parts of the world. If you want to find a quick and easy profit, borrow money in Germany, where the 10-year bund yields 0.8%, and put it in the US 10-year Treasury at 2.31%, plus you get the increase in the dollar. The euro looks set to continue its downward path, propelled by the strong desire of the weaker governments in the monetary union to see a further devaluation to aid Europe’s very patchy growth prospects. And if you feel a bit more risky, borrow money in Germany and put some in US stocks.

So, the markets are betting on global stimulus, or if you prefer, free money from the central bankers, but does that really help? Well, it certainly helps the financial markets, but the economy? … Not so much. Jens Weidmann, Germany’s central bank president delivered a speech today where he said that monetary policy alone can’t create growth, and must be based on higher productivity and policy reforms.

Weidmann says: “Central banks are not able to deliver growth. Whenever we meet, this is always the first question, there is the conception that there is this silver bullet and this is distracting our attention from the main problem.”

Where does growth come from? Well, perhaps you saw the 60 Minutes story on infrastructure. According to the American Society of Civil Engineers “investing in infrastructure is essential to support healthy, vibrant communities. Infrastructure is also critical for long-term economic growth, increasing GDP, employment, household income, and exports. The reverse is also true – without prioritizing our nation’s infrastructure needs, deteriorating conditions can become a drag on the economy.”

By the way, the ASCE reports the US grades out at D+ on infrastructure. The U.S. ranks #16 globally for infrastructure, according to the World Economic Forum. In case you missed it here are some other notable stats from the 60 Minutes story:
One out of every 9 bridges in America, more than 70,000 across the country, is considered deficient. Almost one-third of the major roads in the U.S. are in poor condition. Only 2 of 14 major ports on the eastern seaboard will be able to accommodate the super-sized cargo ships that will soon be coming through the newly expanded Panama Canal. There are more than 14,000 miles of high-speed rail operating around the world, but none in the United States. U.S. air travel is the world’s most congested, due to “a shortage of airports runways and gates along [with] outmoded air traffic control systems.”

And in case you were wondering, the engineers estimate we need to spend $3.6 trillion on infrastructure by 2020. The engineers do not offer a financing plan. Which brings us around to one of the great debates between those who see depressions as the result of inadequate demand, implying that inflation will fall and that printing money does nothing unless it boosts employment, and those who see depressions as the result of mal-investment, and who predict that running the printing presses will lead to runaway inflation.

To test the opposing sides of the debate you would need to run economic tests where central bankers respond to a massive downturn with aggressive monetary stimulus. Which has been going on for a few years now, and everywhere you look inflation is low and threatening to jump over to deflation. So, running the printing press does not lead to inflation or hyperinflation, and it does a poor job of increasing demand. Monetary stimulus tends to concentrate on the financial markets but it never seems to trickle down. We’ve run that test and it does not work. Demand comes from higher productivity, and higher productivity can be achieved by investing in infrastructure.

It’s time now for another edition of “Banks Behaving Badly.” We all know that Wall Street analysts play a crazy game, it has been going on for a long time. More than 10 years ago, prosecutors cracked down on research analysts who served the interests of investment banks over the investing public. Seems not all the analysts and investment banks got the memo. Today, the Financial Industry Regulatory Authority, or Finra, fined Citigroup $15 million for failing to adequately supervise its research analysts’ interactions with the bank’s clients.

In one example cited by Finra, Citigroup hosted “idea dinners” for institutional clients at which some of the bank’s equity research analysts discussed stock tips that differed from their published research. In another, an analyst helped the bank’s investment banking clients with their investor “road show” presentations ahead of a public offering. Even when Citigroup discovered problems with its analysts’ communications with clients, Finra says the bank’s disciplinary actions “lacked the severity necessary to deter repeat violations.’’ Citigroup agreed to settle the case with Finra without admitting or denying the charges.

A $15 million fine? That is embarrassingly small for a mega bank like Citi. What other mischief have they been up to? Well, the European Central Bank kicked Citigroup out of its foreign-exchange market liaison group after the Citi was fined for rigging the ECB’s own currency benchmark. The ECB removed Citigroup from the panel, which advises the central bank on market trends, after regulators fined the lender $1 billion for rigging currency benchmarks including the ECB’s p.m. fix. Citigroup was one of six banks fined $4.3 billion by U.S. and U.K. regulators last week and is the only one that also sits on the ECB Foreign Exchange Contact Group. Citigroup is the world’s biggest foreign-exchange dealer, with a 16 percent market share.

While 49 state treasuries were submerged in red ink after the 2008 financial crash, one state’s bank outperformed all others and actually launched an economy-shifting new industry. So reports the Wall Street Journal this past week, discussing the Bank of North Dakota and its striking success in the midst of a national financial collapse led by the major banks. The article states: “It is more profitable than Goldman Sachs, has a better credit rating than JPMorgan Chase and hasn’t seen profit growth drop since 2003. Meet Bank of North Dakota, the U.S.’s lone state-owned bank, which has one branch, no automated teller machines and not a single investment banker.”

The reason for its success? As the sole repository of the state of North Dakota’s revenue, the bank has been one of the biggest beneficiaries of the boom in Bakken shale-oil production from hydraulic fracturing, or fracking. In fact, the bank played a crucial part in kick-starting the oil frenzy in the state in 2008 amid the financial crisis. And that may be partially true, however, the oil boom did not actually hit North Dakota until 2010. Yet it was the sole state to have escaped the credit crisis by the spring of 2009, when every other state’s budget had already dipped into negative territory. According to Standard & Poor’s, the BND’s return on equity was up to 23.4% in 2009 – substantially higher than in any of the years of the oil boom that began in 2010.

The real reason for the Bank of North Dakota’s success is much more simple: profits, rather than being siphoned into offshore tax havens, are recycled back into the bank, the state and the community; costs are low – no exorbitantly-paid executives; no bonuses, fees, or commissions; the bank’s mission is promoting economic development, not competing with private banks.

FINANCIAL REVIEW

Catch a Falling Star

Sinclair Noe — November 12, 2014

Podcast: Play in new window | Download (Duration: 13:20 — 6.1MB)

DOW – 2 = 17,612
SPX – 1 = 2038
NAS + 14 = 4675
10 YR YLD un = 2.36%
OIL – 1.19 = 76.75
GOLD – 2.80 = 1161.10
SILV – .04 = 15.76

Stocks have been on a run lately, with the Dow Industrials and the S&P 500 hitting record highs yesterday, and the Dow Transports closing at a new high today. Yesterday, the S&P 500 marked its 40th new closing high of the year, versus 45 in 2013. The last five-day streak of record highs was in May 2013, and the next longest was eight days in June 1997. The Dow also hit a record yesterday, marking 6 consecutive record highs, its longest since June. The S&P 500 has closed above its 5 day moving average for the 19th consecutive session, a streak that has only occurred seven times in the past 20 years. And today did not reverse the trend.

Typically, after a rally like this you might expect a pullback; not necessarily a correction, but a pullback; a pause to catch your breath. And so, now would not look like a good time to buy, but you also haven’t seen a signal to sell, at least not yet. Meanwhile, the advance has been so straight and fast that it hasn’t left any support levels in its wake. You might look at S&P 2000 as a round number, but that is meaningless; there was a little consolidation last week around 2001, but that is not much. Beyond that, you look at another weak support at 1925, and then the real strong support at 1820. Working off trend lines, the 50 day moving average is at 1972. In other words, this rally has outrun its support.

Over the past month, you would be hard pressed to find a sweeter chart than the Dow Jones Transports, which hit another record high close, up 30 at 9091. Those trains just keep on rolling down the track.

Yesterday and today seemed more a pause in the markets. Earnings season is winding down, and it looks like a very good quarter for companies. Only about 40 of the S&P 500 companies are left to report, and it looks like 75% of companies that have reported beat expectations, and overall earnings growth is around 10% from the year ago quarter. That’s about as good as it gets.

Time now for another edition of “Banks Behaving Badly”. Today it was announced that 5 banks are being fined for manipulating the foreign exchange market; this is the $5.3 trillion dollar a day market for currencies, also known as the Forex Market or FX. The investigation was led by the US
Commodity Futures Trading Commission, Britain’s Financial Conduct Authority, and the Swiss Financial market Supervisory Authority. The 5 banks that reached a settlement are: Citigroup, UBS, JPMorgan Chase, Royal Bank of Scotland, and HSBC; the usual suspects.

UBS agreed to pay the largest fine at $800 million, even as regulators acknowledged the bank was first to cooperate on the probe. Separately, the Office of the Comptroller of the Currency has assessed an additional $950 million against Bank of America, Citigroup and JPMorgan for “unsafe or unsound practices” tied to their foreign exchange trading. The total fines are $618 million for HSBC, $634 million for RBS, $1 billion each for JPMorgan and Citi, and $250 million for BofA.

Basically the Forex traders would get together or phone other traders or instant message or plan their schemes in chat rooms to manipulate prices to improve their trades, even if it meant screwing their customers. The instant messages left a digital trail of incriminating evidence. The traders knew they were breaking the law and they did it anyway. The evidence released today included transcripts that the fraud and collusion was taking place within the last year; this is not some scam from 2007. Now, remember that all these banks have a long list of transgressions that resulted in deferred prosecution agreements. Supposedly they are on parole, and they have violated their parole, again.

Tim Massad, chairman of the CFTC, issued a statement, saying: “Today’s enforcement action should be seen as a message to all market participants that wrongdoing and foul play in the financial markets is unacceptable and will not be tolerated.”

What a crock.

It is tolerated. It has been tolerated in the past, and there is nothing to indicate that today’s fines will change much. We’ve seen similar behavior in interest rate markets; the Libor, London Interbank Offered Rate, is manipulated; the ISDA fix in the derivatives markets is manipulated; the precious metals markets are manipulated; the US stock markets sell special high speed access to allow certain firms to manipulate the stock markets. The list goes on. And with every manipulation, the banksters steal a little bit more; they just walk right up and take it out of your wallet.

And the fines today will not deter illegal activity. Several traders have been fired or suspended; many are still trading. And just who goes to jail for this fraud? Not one person, although we hear that there are criminal investigations; which means there will be a few junior level traders that will be thrown under the bus. But today’s fines are mainly another slap on the wrist. Part of the punishment today comes from the Swiss regulators who state that the manipulators at UBS must limit bonuses for traders of foreign exchange and precious metals to 200% of their base salary for two years. Which means the bank will now have to raise the base salary for traders. That’ll teach them.

This purportedly groundbreaking settlement is characteristic of the other ones that have come before it: there’s no mention as to whether an actual legal process was pursued, whether depositions were taken or whether an expert came up with a number for total damages. The settlement is supposed to placate the public, but when the rate controls the trading of over 5-trillion dollars on a daily basis, is 4 billion enough?

The combined fines calculate to be $4.25 billion. The banksters named today trade $5.3 trillion on the foreign exchange each day of the week. The fines calculate to be a 0.08% penalty on what these banks trade daily on the exchange. Again, not eight percent, but 0.08%. These aren’t fines against the banks. $4.25 billion is not punitive. It’s their pocket change.

Despite banksters’ protestations that things are changing, there is evidence published today suggesting that, before the official investigation, whistle-blowers were ignored by banks and complaints from customers (the global businesses and pension funds that rely on foreign exchange markets) pushed aside.

President Obama is in Asia, on his way to the G-20 conference, and at a state visit in China last night China and the US announced new pledges on greenhouse gas emissions. The US will try to reduce US levels between 26% and 28% by 2025, compared to 2005 levels. President Obama’s offer is based on cuts in carbon emissions from coal power. China did not set a specific target, but said emissions would peak by 2030, and that 20% of the country’s energy would come from emission-free sources by then. The two countries also agreed to reduce the possibility of military accidents in the air and sea. It is the first time China has set an approximate date for emissions to peak. The two countries together produce about 45% of the world’s carbon dioxide.

Setting a 2030 target for peak carbon emissions is a first for China, but most analysts expected China’s emissions to peak about that time anyway. Beijing has recently shown it is serious about cleaning up its emissions by strengthening environmental laws, toughening regulations, and stepping up oversight of factories and power plants. They had to do something because the air was thick as soup, and causing health problems. They either had to clean up or watch people stop breathing. The bigger challenge for China may be satisfying the pledge to get 20% of its energy from non-emissions producing sources. That promise will require an additional 800-1,000 gigawatts of nuclear, wind, solar and other zero emission generation capacity; an amount roughly equal to the entire US electricity capacity today.

Under the Kyoto plan, developed economies, including the United States, were supposed to cut their fossil fuel emissions, while developing countries like China were exempt. The United States refused to ratify the treaty, while China went on to become the world’s largest carbon polluter. Many other governments also refused to change pollution standards because the world’s two largest polluters were not acting, so why should they.

The agreement is not binding. If they take the actions to meet the targets, then it’s meaningful, but for now it’s a paper promise. And since physics is uninterested in spin, all the hard work lies ahead.

NATO officials say Russian troops and military equipment including tanks, artillery, air defense systems, and combat troops have been sighted entering Ukraine. Russia’s defense ministry denied that its troops were in eastern Ukraine to help pro-Russian separatists there. However, the rebels have admitted being helped by “volunteers” from Russia. The United Nations Security Council is convening an emergency session on Wednesday to discuss the reported sightings. Fighting and artillery fire have been reported around the cities of Donetsk and Luhansk.

The Rosetta mission has achieved something quite remarkable; the combined effort of the European Space Agency and NASA has landed an unmanned spacecraft on a comet. After flying for 10 years and traversing some 317 million miles the Rosetta orbiter touched down on Comet 67P at 11:00 AM Eastern time. The spacecraft that landed on the comet is about the size of a dishwasher and it has already sent back photos of the comet. The craft has about 2 days of battery life left, and then it will try to operate on solar powered backup batteries, with a little bit of luck.

The point of Rosetta is to gain insight on the universe’s infancy. Comets are the perfect subjects for such study: unlike stars and planets, whose chemistries evolve slowly but significantly, comets are pretty much the same ice balls they were a few billion years ago. By analyzing this comet’s composition, the Rosetta landing craft will help researchers determine the role that comets played in the nascent days of our solar system and the earth; if their ice brought us water, and if the organic matter in their crusts provided the crucial ingredients for life. And what it also tells us is that we are still capable of incredible accomplishments.

FINANCIAL REVIEW

Lather, Rinse, Repeat

Sinclair Noe — November 4, 2014

Podcast: Play in new window | Download (Duration: 13:15 — 6.1MB)

Financial Review

DOW + 17 = 17,383
SPX – 5 = 2012
NAS – 15 = 4623
10 YR YLD – .01 = 2.34%
OIL – 1.31 = 77.47
GOLD + 2.90 = 1169.20
SILV – .11 = 16.13

Election Day 2014! We should all be very, very happy. Forget about red and blue, we can all count our blessings because the campaign ads on radio and TV are going away. There is one redeeming thing about this whole election. It will be over in a few hours. Say hallelujah!

Or you could say that it’s amazing that anyone bothers to vote given that our choices are between tweedle dumb and tweedle dumber. Still, I went to the polls today, early, and I cast my ballot. I was the only voter voting. In a few hours we’ll get the results. And the most likely result is that not much will change, despite the drama and despite hundreds of millions to persuade you. It takes a fortune for a politician to get beat these days, but most of the money isn’t real, it’s magic money that doesn’t belong to anybody, or at least nobody is willing to admit they spend money on politics. We’ve got the best politicians money can buy.

The present split Congress is the least-productive in US history. Regardless of the election’s outcome, the 114th Congress is unlikely to be any more productive than the 113th. Maybe that’s good news; when they do something is when they become dangerous. There are plenty of issues worthy of intelligent discussion and debate, however that never seemed important in this midterm election. That we have been burden with such an abundance of bull and still survived just shows we are a super nation.

Lather, rinse, repeat.

Let’s look at the economic news.

Home prices were down slightly in September, according to Corelogic prices were down 0.1% for the month and that resulted in year to year growth of 5.6%, the slowest pace in 2 years. So, the rate of growth in home prices has clearly slowed. For Arizona, home prices are still down 30% from the peak.

New orders for US factory goods fell for the second straight month, down 0.6% in September. August’s orders were slightly revised to show a 10.0 percent fall instead of the previously reported 10.1 percent decline. The decline in orders was led by aircraft, machinery, capital goods and computers and electronic products.

Yesterday we reported that auto sales were up in the third quarter, but the car companies are calling them back faster than they can sell them. Toyota is recalling 5,850 vehicles because of a possible loss of steering control. Ford is looking at 5 recalls totaling 202,000 vehicles for a variety of issues, including an incorrect repair of a steering problem in a previous recall.

Oil futures dipped under $76 a barrel for a while today. If there was any doubt on which country Saudi Arabia was targeting with their price shattering oil production, there is not any doubt now. While Russia, Iran and Venezuela might turn out to be collateral damage in the Saudi oil production surge, the message that Saudi Arabia is trying to send is directed to the US shale producers. The Kingdom made no secret of their displeasure yesterday when they cut oil prices to US buyers while raising them for everyone else in the world. Saudi Aramco next month will sell its Arab Light to clients in Asia for 10 cents less than Middle East benchmarks, the November discount was $1.05 yet it lowered prices for all grades to the US.

The plan is to maintain market share in the US and bury the US energy producers. The Saudis fear predictions that US oil imports could fall to zero by 2037 as a reason they need to nip US oil producers in the bud. They are threatened by US oil production and they are acting to try to break the US producers back. That is one of the reasons todays balance of trade numbers weren’t much higher, even in the face of a strong dollar. The US not only has reduced oil imports but has become a major exporter of oil products.

The nation’s trade deficit increased 7.6% in September to the highest level since the late spring as exports to Europe, China and Japan all fell. In turn, this will likely lead to a lower revision of third quarter GDP; probably a drop from the 3.5% initial estimate, down to about 3%. In September, the trade gap climbed to a seasonally adjusted $43 billion from a slightly revised $40 billion in August. Yet if petroleum is excluded, the nation’s trade gap climbed to $47.2 billion in September to mark the highest level in seven years. Here’s the downside of a strong dollar: US exports of goods fell 3.2% with China, 6.5% with the European Union and 14.7% with Japan.

It’s not just a strong dollar but a combination of weak global economies. Today the European Commission said the Eurozone will need another year to reach even a modest level of economic growth. The new forecast calls for 0.8% growth across the Eurozone economy this year, and just 1.1% growth next year.

The Independent Evaluation Office of the International Monetary Fund issued a report that basically says the IMF did a poor job responding to the financial crisis; the IMF ignored its own research and pushed too early for richer countries to trim budgets. They admit the IMF was overly concerned about high debt levels and large fiscal deficits, and urged countries like Germany, the United States and Japan to pursue austerity in 2010-11 before their economies had fully recovered from the crisis. At the same time, the IMF advocated loose monetary policies to sustain growth and boost demand in advanced economies, initially ignoring the possible spillover risks of such policies for emerging market countries. In 2012, the IMF finally admitted that it had underestimated how much budget cuts could hurt growth and recommended a slower pace for austerity policies. But its auditor said the IMF’s own research showed this relationship even before the crisis.

The European Central Bank meets Thursday to try and figure out their next course of action.

Lather, rinse, repeat.

While every major economy in the world has followed essentially the same monetary policy since 2008, their fiscal policies have been very different and the divergence in outcomes, especially when we compare the United States and Europe, has been exactly the opposite to what was implied by the rhetoric of most politicians and central banks.

Countries that took emergency measures to reduce public borrowing have mostly suffered weaker growth, as in the case of Britain from 2010 to 2012, Japan this year and the United States after the 2013 “sequester” and fiscal cliff deal. In more extreme cases, such as Italy and Spain, fiscal tightening has plunged them back into deep recession and aggravated financial crises. Meanwhile countries that ignored their deficit problems, as in the United States for most of the post-crisis period, or where governments decided to downplay their fiscal tightening plans, as in Britain this year or Japan in 2013, have generally done better, both in terms of economics and finance.

When faced with private sector deleveraging, there are limits to the persuasive powers of low interest rates to revive private economic activity; low rates may help in an inflationary environment, but in a deflationary environment, spending is needed to stimulate demand. With interest rates at or near zero, private demand cannot be simulated with further rate cuts and this means that monetary easing can no longer offset fiscal tightening. As a result, any reduction in budget deficits becomes more and more deflationary. The flip side is that fiscal expansion could truly provide economic stimulus without the worry of interest rate increases. That doesn’t mean that we will see fiscal expansion to correct the problem, just because there is indisputable mathematics to support it.

Lather, rinse, repeat.

JPMorgan Chase has added $2.4 billion to its estimate of the amount of legal costs it may face. That figure was disclosed yesterday in a securities filing in which the bank also formally acknowledged that it was facing a criminal investigation by the Justice Department into the behavior of traders in the foreign exchange market. In the past few days, Citigroup, Royal Bank of Scotland, HSBC, and Barclays all announced new reserves totaling more than $2.3 billion to deal with investigations into foreign exchange rate manipulation. Deutsche Bank added more than $1 billion to legal reserves for the expected cost of settlements. The cases involve collusion in the $5.3 trillion daily foreign exchange market to affect rates.

If it sounds familiar, well that is because we have seen settlements like this before. In 2012 Barclays and UBS entered deals to pay fines totaling almost $2 billion; a UBS subsidiary pleaded guilty to rigging Libor. The prosecutors and regulators probably thought the agreements would deter further bad behavior. The deals involved non-prosecution or deferred prosecution agreements. The agreements allow the Justice Department to reinstate charges if there is any future violation of the law. Most important, admissions by the bank as part of the settlement can be used against it as evidence later, essentially stripping the bank of any possible defenses if the case were to proceed further. There is little chance, then, that a bank could fight the charges, so it would have to agree to a new settlement with more onerous terms and a new penalty.

But it turns out that simply slapping the banks with more and bigger fines, does not deter future bad behavior. The government is not required to minimize the collateral consequences of a conviction, and individuals are usually required to fend for themselves if they are convicted of a crime. But the foreign exchange inquiry involves a number of leading global banks, each with thousands of employees worldwide. So federal prosecutors go for punishment that does not threaten the continued existence of one of the banks. In other words, punishment that doesn’t actually punish.

The government has imposed billions of dollars in fines over the past few years for corporate violations, part of an effort to show that no company is “too big to jail”, while steadfastly refusing to actually jail a bank or major bank executives for criminal violations.

Lather, rinse, repeat.